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Reader Richard is wondering about a statement I made in Problem is
Demand: First IBM, then
Intel, now Google.
Specifically Richard questions my
statement "In spite of what
everyone seems to think, the Fed is not really in control of much of anything".
Richard writes ...
Hi, Mish
I am a big
fan of yours but I am shocked, however, by your quote in my subject line. How can you say
that when the Fed totally controls everything in the financial markets not only in the U.S.
but much of elsewhere in
the world? It is single-highhandedly
propping up the U.S. equity
market, rendering bond
vigilantes ineffective in the bond market, and creating an "echo real estate bubble" at will!
Hoping to hear an elaboration from you in your next
blog.
Regards, Richard
No Echo Bubble in Housing
Hello Richard, for starters, there is no echo real estate bubble.
Home sales are at depressed
levels, financial institutions
are still overloaded with hugely underwater
properties, and prices
have bounced a bit in some areas, by 5-10% bounces following 50-60% declines hardly constitutes an echo bubble.
Had Richard said the Fed created an echo bubble in stock prices, I would have agreed. Let's step back a second and
look at the three primary things the Fed wants to accomplish.
Three Things
Fed Desperate to Accomplish
1.
Stimulate Credit
2.
Stimulate Jobs
3.
Stimulate Housing
The Fed has failed at all
three. Arguably, credit has risen, but nearly all of the rise is student loans,
making debt slaves out of
kids in the process, something
the Fed certainly does
not want to accomplish.
In September 2011, Ben Bernanke
said he was surprised by weak consumer spending. I wrote about it in Bernanke, a Complete Dunce, "Puzzled by Weak Consumer Spending"
In March of 2012, Bernanke said
he was puzzled over jobs. I wrote
about that in Bernanke Puzzled
Over Jobs, Cites Okun's Law; Six Things Bernanke is Clueless About
On October 15, the president
of the New York Fed complained about the "poor performance of the U.S. economy"
as well as "inadequate
aggregate demand".
For discussion, please see
Recovery, Monetary
Policy, and Demographics: NY Fed vs. Mish Analysis
How Can The Fed Be In Control When ...
How can the Fed be in
control when it cannot spur jobs, it cannot spur
housing, it cannot spur credit,
it remains puzzled over numerous things, and in fact launched QE III in a moment of Panic!
To be sure the Fed has taken
credit for the surging
stock market.
However, in terms of the Fed's real goals, this is like attempting
to cure lung cancer and failing,
but by happenstance removing
a wart from a big toe and declaring
success.
The Fed is not in control, it
is only an illusion. One other person commented on this recently.
Please consider the Hoisington Third Quarter 2012 Review by Lacy Hunt. The
article discusses QE1, QE2, QE3, demand curves, commodities, and numerous other ideas in a six-page PDF.
The article is well worth a read in entirety, but here are a few key snips ...
While prices
for risk assets have improved, governments have not
been able to address underlying
debt imbalances. Thus, nothing suggests that these latest actions do anything to change the extreme
over-indebtedness of major global economies.
To avoid recession in the
U.S., the Federal Reserve embarked
on open-ended quantitative easing
(QE3). Importantly, the enactment
of QE3 is a tacit
admission by the Fed that earlier
efforts failed, but this
action will also fail to bring about stronger economic growth.
Three studies show that the impact of wealth on spending is miniscule—indeed, “nearly not
observable.” How the Fed expects the U.S. to
gain any economic traction
from higher stock prices when rising
commodity prices are curtailing real income and spending is puzzling.
This is particularly
relevant when econometricians
have estimated that for every dollar of gained real income, consumption will rise by about 70 cents.
Conversely, the Fed actions are causing
real incomes to decline, which has a 70-cent negative
impact on spending for every
dollar loss. Compare that
with the 0.004 positive impact on spending for every one-dollar increase in wealth. Former Fed
Chairman, Paul Volcker, summarized
the new Fed initiative as sufficiently and succinctly as anyone when he stated
that another round of QE3
“is understandable,
but it will fail to fix the problem.”
Fed Without Options
Lacy Hunt concludes with ...
For Fed policy to improve
real GDP, actions must be taken
that either (1) shift the
entire demand curve outward (to the right),
or (2) do not cause an inward shift of the AS curve that induces
an adverse movement along
the AD curve. Accordingly,
the Fed is without options
to improve the pace of economic
activity.
Bernanke says he is not out of options, so Lord only knows what
he may try. However, Lacy Hunt's statements
are accurate.
Simply put, the Fed is without options that will do any good for the economy.
Control of Stock Market? Interest
Rates? What?
The Fed is not in "control" of the stock market. Creating echo bubbles does not constitute control. Bubbles, by definition, pop.
If you think the Fed is in "control" of interest
rates, you need to reconsider that as well. Certainly the Fed has distorted the bond market and yields, but most likely in the direction of the trend. Regardless,
distortions do not constitute
"control" no matter how it appears in short-term periods.
Given the folks at Hoisington and other small select groups of individuals
and bloggers know as I do, that
Fed "control" is nothing more than a mirage, I need to make a slight change in my statement.
Here is the revision: In spite of what [nearly] everyone seems to think, the Fed is not really in control of much of anything.
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